At first glance, things aren’t THAT bad today, as the Dow is off by about 0.7% and the S&P 500 is 0.8% lower. Technology is today’s laggard, lower by about 1.6%. Despite red across the screen, the indexes are masking some serious weakness under the surface. Many of the recent momentum leaders, such as LNKD, NFLX, FB, BIDU, and SINA are plunging today. Whether this trend persists or is a small blip on the map remains to be seen. What is certain is that there has still yet to be any positive news out of Washington, and markets don’t like uncertainty. Despite the stock swoon, other major asset classes aren’t catching much of a bid. Bonds are only slightly higher after two lackluster auctions today, and metals are also only modestly in the green for the day.

CHART OF THE DAY

Western Digital (WDC) – The digital storage company was strong early this year, but has since entered a period of choppy sideways action. However, it appears that WDC may be ready to make a move out of this recent range. On a daily time frame, the shares are coiled tightly in a symmetrical triangle chart pattern. This implies a move could be on the near horizon. WDC is set to report its quarterly earnings on 10/24, and the shares could make a big move on that report. In my opinion, the options market is underpricing the potential for volatility on the stock, as options are currently priced in the bottom third of all readings seen over the course of the past year. This makes a long volatility strategy into earnings very attractive. The options will likely be bid up into the report, so there’s a good chance that you can get a “free ride” into the quarterly release.

I like buying the WDC November 65-strike straddle for about $7.00. This trade will profit on a move above $72 or below $58 by November 15.

courtesy of stockcharts.com

WHAT I’M EXPECTING

Markets will likely continue to chop in a volatile fashion until some sort of positive news surfaces out of Washington. The bias is now to the downside, but any potential budget deal could spark a rally. We’re now in a very news-driven tape, so take only your best setups on each side of the market.

Bryan Sapp is a Senior Trading Analyst at Schaeffer’s Investment Research, where he has specialized in volatility-based options trading since early 2010. With Bryan at the helm, Schaeffer’s Volatility Trader generated a 2012 portfolio return of 70% for subscribers. This real-time option recommendation service exclusively trades short-term straddles. Prior to joining the research team at Schaeffer’s, Bryan honed his skills as a speculator by trading his own account, and playing poker professionally to pay his way through college. Bryan attended the University of Louisville, where he received his Bachelors in Economics and an MBA with an Entrepreneurship focus.